GOING CONCERN

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GOING CONCERN

• INTERNATIONAL STANDARD ON AUDITING 570

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The purpose of this ISA

• Provide guidance on the auditors responsibility
  in the audit of financial statements with respect
  to the going concern assumption used in the
  preparation of the financial statements,
  including considering managements assessment of
  the entitys ability to continue as a going
  concern.

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Managements Responsibility

• The going concern assumption is fundamental in
  the preparation of financial statements. Under
  the going concern assumption, an entity is
  ordinarily viewed as continuing in business for
  the foreseeable future with neither the intention
  nor the necessity of liquidation, ceasing trading
  or seeking protection from creditors pursuant to
  laws or regulations. Accordingly, assets and
  liabilities are recorded on the basis that the
  entity will be able to realize its assets and
  discharge its liabilities in the normal course of
  business.

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Managements Assessment

• Involves making a judgment, at a particular point
  in time, about the future outcome of events or
  conditions which are inherently uncertain. The
  following factors are relevant
• Outcome of an event
• Availability of information at the date of the
  judgment
• Size and complexity of the entity

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Nature of events or conditions

• Events or conditions that lead to significant
  doubt about the going concern assumption
• Financial
• Operating
• Other

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Financial Events Examples

• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity
  without realistic prospects of renewal or
  repayment
• Indications of withdrawal of financial
  support by debtors and other creditors.
• Negative operating cash flows indicated by
  historical or prospective financial statements.
• Adverse key financial ratios.
• Substantial operating losses or significant
  deterioration in the value of assets used to
  generate cash flows.
• Inability to pay creditors on due dates.
• Inability to comply with the terms of loan
  agreements.
• Change from credit to cash-on-delivery
  transactions with suppliers.
• Inability to obtain financing for essential new
  product development or other essential
  investments.

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Operating Events Examples

• Loss of key management without replacement.
• Loss of a major market, franchise, license, or
  principal supplier.
• Labor difficulties or shortages of important
  supplies.

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Other Events Examples

• Non-compliance with capital or other statutory
  requirements.
• Pending legal or regulatory proceedings against
  the entity that may, if successful, result in
  claims that are unlikely to be satisfied.
• Changes in legislation or government policy
  expected to adversely affect the entity

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Auditors Responsibility

• Is to consider the appropriateness of
  managements use of the going concern assumption
  in the preparation of the financial statements
• Consider whether there are material uncertainties
  about the entitys ability to continue as
  a going concern that need to be disclosed
  in the financial statements

10
Responsibility (contd)

• The auditor cannot predict future events or
  conditions that may cause an entity to cease to
  continue as a going concern.
• The absence of any reference to going concern
  uncertainty in an auditors report cannot be
  viewed as a guarantee as to the entitys ability
  to continue as a going concern.

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Planning the Audit

• The auditor should consider whether there are
  events or conditions and related business risks
  which may cast significant doubt on the entitys
  ability to continue as a going concern.
• If in doubt about events that affect the going
  concern assumption and identified, auditor has to
  take it into consideration in the assessment of
  the risk of material misstatement.

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Evaluating Managements Assessment

• The auditor should evaluate managements
  assessment of the entitys ability to continue
  as a going concern.
• The auditor should consider the same period as
  that used by management . If managements
  assessment of the entitys ability to continue as
  a going concern covers less than twelve months
  from the balance sheet date, the auditor should
  ask management to extend its assessment period to
  twelve months from the balance sheet date.

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Period Beyond Managements Assessment

• The auditor should inquire of management as to
  its knowledge of events or conditions and related
  business risks beyond the period of assessment
  used by management that may cast significant
  doubt on the entitys ability to continue as a
  going concern.

14
Further Audit Procedures when Events or
Conditions are Identified

• When events or conditions have been identified
  the auditor should
• Review managements plans for future actions
  based on its going concern assessment
• Gather sufficient appropriate audit evidence to
  confirm or dispel whether or not a material
  uncertainty exists through carrying out audit
  procedures considered necessary, including
  considering the effect of any plans of management
  and other mitigating factors and
• Seek written representations from management
  regarding its plans for future action.

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Relevant Audit Procedures

• Analyzing and discussing cash flow, profit and
  other relevant forecasts with management.
• Analyzing and discussing the entitys latest
  available interim financial statements.
• Reviewing the terms of debentures and loan
  agreements and determining whether any have been
  breached.
• Reading minutes of the meetings of shareholders,
  those charged with governance and relevant
  committees for reference to financing
  difficulties.
• Inquiring of the entitys lawyer regarding the
  existence of litigation and claims and the
  reasonableness of managements assessments of
  their outcome and the estimate of their financial
  implications.
• Confirming the existence, legality and
  enforceability of arrangements to provide or
  maintain financial support with related and third
  parties and assessing the financial ability of
  such parties to provide additional funds.
• Considering the entitys plans to deal with
  unfilled customer orders.
• Reviewing events after period end to identify
  those that either mitigate or otherwise affect
  the entitys ability to continue as a going
  concern.

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Significance of the cash flow

• The reliability of the entitys information
  system for generating such information and
• Whether there is adequate support for the
  assumptions underlying the forecast.
• In addition the auditor compares
• The prospective financial information for recent
  prior periods with historical results and
• The prospective financial information for
  the current period with results achieved to
  date

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Audit Conclusions and Reporting

• Based on the audit evidence obtained, the auditor
  should determine if, in the auditors judgment, a
  material uncertainty exists related to events or
  conditions that alone or in aggregate, may cast
  significant doubt on the entitys ability to
  continue as a going concern.

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Going Concern Assumption Appropriate but a
Material Uncertainty Exists

• The F/S adequately describe the principal events
  or conditions that give rise to the significant
  doubt on the entitys ability to continue in
  operation and managements plans to deal with
  these events or conditions and
• State clearly that there is a material
  uncertainty related to events or conditions which
  may cast significant doubt on the entitys
  ability to continue as a going concern and,
  therefore, that it may be unable to realize its
  assets and discharge its liabilities in the
  normal course of business

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Auditors Report

• If adequate disclosure is made in the financial
  statements, the auditor should express an
  unqualified opinion but modify the auditors
  report by adding an emphasis of matter paragraph
  that highlights the existence of a material
  uncertainty relating to the event or
  condition that may cast significant doubt on
  the entitys ability to continue as a going
  concern and draws attention to the note in the
  financial statements

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Auditors Report

• If adequate disclosure is not made in the
  financial statements, the auditor should express
  a qualified or adverse opinion, as appropriate.
• The report should include specific reference to
  the fact that there is a material uncertainty
  that may cast significant doubt about the
  entitys ability to continue as a going concern.

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Going Concern Assumption Inappropriate

• If, in the auditors judgment, the entity will
  not be able to continue as a going concern, the
  auditor should express an adverse opinion
  if the financial statements have been prepared
  on a going concern basis.